specific items (e.g., anesthesia, surgery, medications), keeping quantity weights temporarily fixed. Then, at appropriate intervals, perhaps every year or two, the BLS should reconstruct the medical care index by pricing the treatment episodes of the 15 to 40 diagnoses— including the effects of changed inputs on the overall cost of those treatments. The frequency with which these diagnosis adjustments should be made will depend in part on the cost to BLS of doing so. The resulting MCPI price indexes should initially be published on an experimental basis. The panel also recommends that the BLS appoint a study group to consider, among other things, the possibility that the index will “jump” at the linkage points and whether a prospective smoothing technique should be used.

Including Employers’ Health Insurance Payments

Currently, CPI weights only reflect consumers’ out-of-pocket expenditures on medical care, including the cost of insurance. As discussed above, this leads to an underestimation of the medical care category of the CPI. Given the uses to which the flagship CPI is put, it is not obvious that expanding the medical care category to include more types of expenditures is advisable. However, a more broadly based measure of the changing cost of medical would be valuable for a wide range of policy purposes.

Recommendation 6-2: BLS should include the portion of health insurance paid for by employers in one version of the CPI, perhaps calling it an “expanded-scope medical CPI.” Because many commonly used income measures exclude employer-provided benefits and because the Consumer Expenditure Survey is based only on out-of-pocket expenditures, the original conception of the MCPI domain should still be maintained in constructing the traditional (flagship) CPI. The panel also recommends examining the practicality of including other employer-paid employee benefits (e.g., dental and life insurance and cafeteria plans) in the expanded-scope CPI.

Expanding the Domain of the MCPI

To inform public policy discussions and to evaluate the performance of the U.S. health care sector, a medical care price index that encompasses purchases from all payers—governments, private third-party insurers, and consumers—is needed. Whether such an index is best constructed by the BLS, the Bureau of Economic Analysis, some other government agency such as the Centers for Medicare and Medicaid Services, or a nongovernmental organization is unclear. What

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